Players Replay The Crash

Chances are you remember where you were and what you were doing the day the stock market crashed on Oct. 19, 1987. It’s one of those special days in history when time seemed to stop. The Dow Industrials 508-point plunge seemed like the end of the party back then, but if wasn’t long before the market rally was back in gear and the irrational exuberance of the go-go 90s arrived.

So twenty years and some 12,000 points later, we talked to people from Wall Street to Washington to put things in perspective.

Edward J. Markey

Markey is one of the longest serving members in Congress, having first been elected to the House of Representatives in 1976. At the time of the crash, he was chairman of the House subcommittee on Telecommunications and Finance, which had significant oversight over securities regulation and the finance industry. (The subcommittee’s responsibilities were later split into two seperate panels.)

He is currently Chairman of the Select Committee on Energy Independence and Global Warming and asenior member of three other committees, including Energy and Commerce.

Where were you the day of the crash?

I was on the Hill and obviously I had been monitoring this very closely with intense focus over the previous two weeks. I was getting increasiningly concerned. I had sent a letter to the SEC chairman and asked for a study of 91-point decline on Oct. 6....On Oct. 15. I sent another letter about the big decline the day before. (Click here to read the original letters.)

(What had happened in the runup to it. On July 23, I held a hearing on program trading. The chairmen of the Securities & Exchange Commission, the Commodies Futures Trading Commission, the Chicago Mercantile Exchange. The Chicago Board of Trade, The New Yorjk Stock Exchange all testifed. They each said it was not a problem and there was no reason to worry.)

What actions did you take?

I flew up to New York and went to the NYSE. Someone told me to check what was going on in the QT (questionable trade) room. The NYSE was reluctant to let me see it, but I was in the midst of an investigation. Dick Grasso took me down to look at the QT room and in this room were all these traders who were fighting over the questionable trades. All this paper was on the floor, obviously a chaotic condition. It took me three years to finish the investigation. On Oct 16, 1990, President Bush signed legislation for proper oversight and coordination of program trading.

So what caused the crash?

Program trading was the principal cause. There was an obviously a problem in the coordination with the CFTC and SEC. The SEC didn’t have proper emergency authority, there wasn't proper clearing and settlement.

Can it happen again?

I think we gave the SEC the authority it needed in order to put in place the proper safeguard, to allow cooperative working agreements, to reduce significantly the likeliehood of a repetition of that kind of event. What happened back then to a certain extent was a technical problem, a serious technical deficiency.

What's different today about communication?

I think it is a lot more sophisticated today than it was then.

What about investing?

You look at the dotcom bust, the subprime stuff, human nature stays the same. It doesn’t change.

John C. Bogle

Bogle founded The Vanguard Group in 1974 and served as Chairman and CEO until 1996. In 1975, he created the Vanguard 500 Index Fund, the first index mutual fund. Bogle is the author of five books. He was born six months before the stock market crash of 1929. He is currently President of Vanguard's Bogle Financial Markets Research Center.

Where were you that day?

"I was in the office all morning then I went to a meeting out of the office. It was Bryn Mawr Hospital. The next day there was one news report that I was so shocked by what had happened I was taken to the hospital.

The next morning. I got everyone into the office at 6am. Every one had been trained to handle the call volume. It was one of the most exciting days of my life.

I spoke to shareholders on the phone all day. I took 105 calls that day. I can hear those calls. I remember writing notes to the crew, saying “We’re doing fine. Just keep your cool.’”

We did not get a wave of liquidations. There was not one sign of panic We told clients to stay put. When I went home that evening late, I thought this was over. There’s no measurable panic.

What happened the day of the crash?

“We really just don’t know. What we had was a cascading wave. The stock market had gotten to a greed phase. The signs were kind of ominous. We went from greed to fear with very little hope in between in one day.

Analysis later on found that the biggest factor was the mutual funds always selling as a stock went down -- it was known as portfolio insurance. That proved to be the villain of the piece.

Can it happen again?

Of course it could happen again. As I said long before the event, in 1986, 'Don’t be surprised if the market loses 100 points The lesson of all this is that in the stock market anything can happen

What's different about investors, investing and the markets today?

It’s always the same animal but with a different disposition. I look at the market being a little bit more friendly then. We’ve moved from investment to speculation. The stock market is a giant distraction. Why get all exercised about it if you’re a long-term investor?

Shiller is an author, economist and professor. He is also a research associate at the National Bureau of Economic Research. His 2000 book Irrational Exuberance, which warned the stock market was in a bubble-bust mode, was a bestseller. Shiller is assocaited with the school of behavaioral finance. He surveyed investors and traders after the 1987 crash, the results of which essentially concluded that investment decisions are emotional not rational. He currently serves as the Stanley B. Resor Professor of Economics at Yale and a Fellow at the Yale International Center for Finance, Yale School of Management.

Where were you the day of the crash?

I was giving a lecture on finance and a student had a transistor radio and he said, ‘Do you know what’s happening?’ and I said ‘No.” After class I walked down to Merrill Lynch in New Haven. I decided I wanted to study the event.”

Twenty years later what do you think happened?

In some ways my survey discovered the obvious—the market was too high. although the P/E ratio wasn't as high as it was in 2000, it was perceived to be high. On the way to it, there was a succession of record drops that got people increasingly fearful.

So was it simply fear and panic?

I didn’t use those words in words. They came up pretty frequently, though. I asked if the crash was caused by psychology or fundamentals. When I asked them to write something they said the market was over-priced.

Can it happen again?

It is possible we’re coming up a very bad period. Volatility is picking up.

Robert Hormats

Hormats joined Goldman in 1982 after more than a decade in the federal government, where he held senior positions at the State Dept., National Security Council and Office of the US Trade Representative. He was working in the firm's investment banking at the time of the crash. He is currently a managing director and vice-chairman of Goldman Sachs International. His most recent book is “The Price of Liberty: Paying for America's Wars”.

What was your first reaction?

I was stunned. It was almost surreal. It was so rapid. It hit you all at once. I equate to a category five hurricane. We didn’t have these Bloomberg computers on our desks as do do now and we had to go out and watch TV and other things.

I remember I was on Peter Jennings show that day or the next with Chuck Schwab. I said it’s not the Great Depression.

No one at the time thought there wouldn’t be a lasting impact. The prism people were looking through was the crash of ‘29. It was a serious collapse of the wealth effect -- not so much that of the economy. It wasn’t like the current thing. It wasn’t an over-leveraged economy.

What's different today?

First of all, there are many more participants in the system -- emerging economies, for instance -- and in ones sense there is more liquidity and growth and that has helped to reduce the severity of a crisis. They can they can come in and buy assets that others might not.

Secondly, there are more players, more types of products, more diversification of asset holdings. That’s generally a good thing in that it apportions risk more broadly. On the other hand, there’s less transparency; who owns these kinds of assets and what’s in them so when markets become very volatile you don’t know which ones of them are able to withstand the volatility.

Are expectations about the Fed's role different? If so, how?

Totally. That’s a plus and a minus. It’s a plus that the Fed is needed to respond to these crises in a robust way. The negative is that may make people a little bit more complacent. The Fed has a difficult job in that it has to protect the economy and system and and in doing so winds up easing some of the pain of people who took risks.

Michael Mussa

Mussa served as Director of the Department of Research at the International Monetary Fund 1991-2001. He’s also taught at the Graduate School of Business of the University of Chicago, the University of Rochester, the Graduate Center of the City University of New York, the London School of Economics, and the Graduate Institute of International Studies in Geneva, Switzerland

He was a member of the US Council of Economic Advisers from August 1986 to September 1988, from where he monitored the crash. He is currently Senior Fellow at the Peterson Institute of International Economics

Where were you?

I was in the chairman’s office (Beryl W. Sprinkel). Since the Friday before when there was a big drop, we were intensely interested in what was happening in the stock market.”

At the CEA, we had a great deal of difficult getting contemporaneous information on how prices were doing in other markets.”

What's different today?

An ordinary individual with a BlackBerry today has better sources of information than what the U.S. government had at that time.

Are trading curbs an effective tool?

“The tape was well behind, so people didn’t know what was happening. So the argument for the curb is to let people catch up with what was happening. They're essentially innocuous."

Can it happen again?

There’s nothing that rules it out, but it probably less likely now then it was at that time. The authorities are more closely tuned in to what’s going on in the markets. Today the Fed would step in the day of not the next day, With a fall in the morning, the Fed would be there I the afternoon.”

William Silber

Silber, a professor at NYU’s Stern School of Business, has also worked on Wall Street (Odyssey Partners and Lehman Brothers) and in Washington (President's Council of Economic Advisors). He’s also traded options and futures and was in the crude oil pit of the New York Mercantile Exchange the day of the crash.

His latest book is “When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America's Monetary Supremacy”

Silber is currently Marcus Nadler Professor of Finance and Economics and Director, Glucksman Institute for Research in Securities Markets at NYU.

Where were you at the time and what was your first reaction?

I was trading crude oil futures at the moment. You look at and ask 'Is what I am seeing for real?' What I was really thinking was what effect was this going to have on other markets. I thought gold would respond. I also though here's an event that changes people's perceptions about risk and that you have to expect things that you wouldn't expect.

Could it happen again?

The one thing that mitigates against it is that everyone expects it. It is probably not going to happen that way.

What's different today?

I worry about the current problem because it is a credit crisis rather than a liquidity crisis. The balance sheet itself has a problem. The Fed knows how to deal with a liquidity crisis. The Fed can’t add liquidity to solve this problem without raising the issue of moral hazard – bailing out institutions for making bad decisions.

We've gotten dangerously close to a sense of real comfort that the Fed will bail us out.

What about the trading curbs and halts put in place after the crash?

I’m not a fan of these trading halts. Halts are OK as long as they are very temporary. The trading curbs are not useful or meaningful except to say let’s take a breather for a minute or two. Closing doesn’t eliminate the decline that would have occurred absent the curb. It allows the payment system time to catch up.

Robert Stovall

Stovall started his Wall Street career at E.F. Hutton in 1953. From 1985 to 1999 he was President of Stovall Twenty First Advisors. He’s also worked for Reynolds, Dean Witter and Prudential Financial. Over the decades, he’s been a columnist for financial magazines and a university professor and lecturer. He is currently Managing Director at Wood Asset Management. Bob was born three years before the crash of 1929. At the time, his father was an administrative partner in a small securities firm.

Where were you the day of the crash?

I remember it vividly because I was managing a portfolio of some size. It had a market neutral strategy -- half long half, short, that is – so we came through better than others. Also I was in the hospital at that time -- Beth Israel – so my assistant was trading the portfolio. I saw it on the TV.

What were you telling your clients?

That we were in unprecedented times. We were short 50% . They were better off being short part of the portfolio. Investors are most consoled if you pay attention for them and are around for them. We didn’t change our strategy.

Did the crash have any lasting effect on investors?

Not too much, based on the 1990s and dot com stocks. You had a super-bull mentality emerging. I call it a crashette because it didn’t produce a long-standing bear market.

Can it happen again?Probably not and certainly not to the degree of 1929.

We’re not as American-centric as we were then. There are more players, more markets, more liquidity, a lot more instruments, more diversification, more cushioning.

Eugene F. Fama

Fama, who has taught at the University of Chicago Graduate School of Business for four decades, mad a name for himself with his dissertation “The Behavior of Stock Market Prices”. Thus, he is known as the father of the efficient market theory, which essentially states that prices on assets such as stocks reflect all known information. He also a board member of Dimensional Fund Advisors, a California-based investment firm. He is currently Robert R. McCormick Distinguished Service Professor of Finance.

Where were you?

I was on an airplane and didn't find out until I was going to school the next day to teach a class and one my colleagues told me about it. I said 'the market is always down on Monday.' People laugh when I say this but it’s not a big deal. In the Great Depression, it was followed by further declines. This one didn’t last long. That’s particularly consistently with my theories.

Can it happen again?

Given that you’ve had two of them in 80 years, there’s always the probability you could have one again. People adjust to the recent past a little too much.

What's different about the market today?

There are a lot more different products.

Did the crash have any lasting impact?

Whatever it was, little has changed--since prices came back. It’s the crash that looks like a mistake on 20/20 hindsight.